Monetary Policy

Dallas Fed Warns Against 'Ultra Easy' Money

Ben S. Bernanke, center, walks to lunch with Martin Redrado, professor of international economics at the Catholic University of Buenos Aires and former president of Argentina's central bank

Federal Reserve Chairman Ben Bernanke, slated to speak Aug. 31 at the annual monetary policy conference in Jackson Hole, Wyo., is under pressure from the hawkish flank of the Fed not to make monetary conditions even easier. A new report from the Federal Reserve Bank of Dallas—whose president, Richard Fisher, is reliably hawkish—warns that “there are limits to what central banks can do.”

The paper’s title says it all: “Ultra Easy Monetary Policy and the Law of Unintended Consequences.”

Bernanke may not agree with the warning, but it’s not his style to run roughshod over dissenters on the rate-setting Federal Open Market Committee, as I explained in an early-August cover story that called Bernanke a “reluctant revolutionary.”

Vincent Reinhart, a former top Fed staffer who is now chief U.S. economist for Morgan Stanley (MS), said there was little chance that Bernanke would make news in Jackson Hole, in part because of his concern for consensus. He said in an Aug. 30 research note that Bernanke “respects that the Federal Open Market Committee is a committee. That is, monetary policy actions are group decisions and it is inappropriate to front run the outcome of a democratic process.”

The Dallas Fed’s article (PDF) is a tour de force of conservative thinking on the risks of easy money. It’s written by William White, who is chairman of the Economic Development & Review Committee of the Organization for Economic Cooperation & Development in Paris. The bottom line is that monetary stimulus might be less effective now in stimulating demand in the economy and that “ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the ‘independence’ of central banks, and can encourage imprudent behavior on the part of governments.”

White’s article will warm the hearts of “Austrian School” economists, who say that their warnings against overindebtedness tend to get ignored by mainstream economists. It cites two giants of the Austrian School, Friedrich Hayek and Ludwig von Mises, noting that they “warned that credit driven expansions would eventually lead to a costly misallocation of real resources (‘malinvestments’) that would end in crisis.”

Bernanke doesn’t buy the Austrians’ arguments. Last year, when Hayek admirer Representative Ron Paul (R-Tex.) asked Bernanke point-blank at a congressional hearing if gold is money, the Fed chairman responded, “No. It’s a precious metal.” But Bernanke prefers to avoid fights as long as he can (mostly) get his way on monetary policy.

Morgan Stanley’s Reinhart told me when I interviewed him for the cover story that the chairman is willing to force his will on the organization only in times of extreme crisis. Reinhart said he understands Bernanke’s hesitation but added, “Maybe a little more imperial wouldn’t be a bad thing.”